City Giants Face Royal Mail IPO Shut-Out

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Some of the biggest banks in the City face being frozen out of the privatisation of Royal Mail amid demands from institutional investors to minimise the number of firms working on the deal.

I understand that ministers, who are being advised by Lazard, the independent investment bank, are likely to restrict to as few as five the number of banks picked to arrange a stock market flotation of the firm.

People close to the situation say that the Government, which is still at the early stages of preparing for a listing, may sell more than £1bn of shares in the first phase of privatisation.

A syndicate comprising two global co-ordinator banks, which would lead the flotation, and up to four bookrunners and lead managers in more junior roles, would be a relatively modest syndicate for an offering of this size. It would mean that some of the biggest names in investment banking would be unable to secure a role on the most prestigious British privatisation for decades.

Sky News revealed last week that Michael Fallon, the Business Minister who is supervising the privatisation plan, is determined to be tough with City banks about the fees they earn from the deal.

It is understood that the decision to hire a handful of banks has been largely driven by feedback from institutional investors, with which Royal Mail executives have been meeting in recent months to outline the company's growth potential.

These institutions have become irritated in recent years about the large numbers of banks working on deals, which restricts the availability of independent analysts' research and, in their view, skews the economics of flotations away from new investors.

By contrast with the proposed syndicate size on Royal Mail, the sale of a 30% stake in the Belgian postal operator, Bpost, is being organised by nine banks. That flotation has been launched by CVC Capital Partners, the buyout firm which has also been sounded out about its interest in Royal Mail if a public listing did not prove viable.

An invitation to tender for roles on Royal Mail's prospective initial public offering (IPO) was circulated last week, and a copy of the document has been obtained by Sky News.

According to the tender, fee arrangements have already been negotiated with Linklaters, the City law firm which will act as legal adviser to the bank underwriters.

It invites respondents to outline "assumptions/views on the appropriate level of discount/premium for the Offering, subject to market conditions and strategies to minimise potential discounts".

It also implies that banks which pitch for a role arranging a flotation of Royal Mail will be more favourably placed if they also commit to helping the company to refinance its debt facilities.

"Please indicate the extent to which you are willing to participate in the new revolving credit and term debt facilities ... as well as the amount you would be prepared to commit and hold in the envisaged financing," the document says.

"Please indicate the extent to which you have received preliminary in-principal (sic) approval from your relevant credit committee for such a participation."

The Government plans to appoint the lead banks on May 24 and the remainder of the syndicate by mid-July.

It had been suggested that Moya Greene, Royal Mail's chief executive, was keen that banks working on the Bpost flotation should be excluded from the British listing, although sources close to the company played down this idea on Wednesday.